If Reeves thinks we have it bad she should consider Lindner's position:

 

Germany faces a rude economic awakening

A rude awakening awaits Europe’s former economic powerhouse

Jeremy Warner25 August 2024 • 9:00am

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Anyone would think we’d been swept away into Lewis Carroll’s Alice Through the Looking Glass. Normally when the economic news is good, the incumbent government likes to boast about it, and contrariwise, to play the news down when it’s poor.

That’s logic, as Tweedledee might have said.

But with Rachel Reeves and her newly installed team at the Treasury, it is the other way around. Positive economic news is treated grudgingly, while the negative is mercilessly played up.

This is the worst economic inheritance since the Second World War, the new Chancellor repeatedly insists in preparing us for tax rises – and she will simply not have it any other way.

Nobody would deny that there are big challenges facing the UK economy, particularly when it comes to the public finances, where the national debt has swollen to nearly 100pc of GDP and there is little sign of the deficit being put on a sustainable footing.

But just look at Germany and things don’t seem quite so bad. Admittedly, the public finances in Germany are in rude health relative to Britain, but the wider economy is struggling as rarely before.

While the UK recorded growth of 0.7pc in the first quarter, Germany barely managed to lift itself out of recession, with growth of just 0.2pc. What’s more, the economy contracted anew in the second quarter even as the UK managed a respectable 0.6pc growth.

The contrast is even more striking when it comes to the more forward-looking data, such as the S&P Global Flash PMI composite output index, a measure of current private sector activity, and the GfK consumer confidence index, one of the longest-running measures of consumer sentiment.

The S&P composite reading for Germany slumped to 48.5 in August, against a relatively healthy 53.4 for the UK, with anything below 50 representing contraction and anything above expansion. Much the same story is told by the GfK consumer confidence data.

Germany is stuck in the doldrums, while the UK economy continues to defy the Government’s doom-mongering with what for the moment is steady growth.

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Two quarters of expansion do not, sadly, a summer make. It would be most unwise to think that the current juxtaposition between British and German levels of economic activity has established a lasting trend.

Even so, the UK might seem structurally to be rather better placed to navigate the constantly shifting sands of today’s world economy than Germany, which is stuck in a rut and lacks the flexibility to get itself out.

Many of the problems that afflict the German economy – poor levels of business investment, stifling red tape and bureaucracy, Nimbyism, an increasingly workshy labour force sustained by overly generous welfare, dilapidated infrastructure and an ageing demographic – are quite similar to those of the UK.

But the causes are different, and they are more entrenched. Germany is finding it difficult to adapt to a fast-changing world and, unable to change itself, is in danger of being left behind.

The key reason for German stagnation is depressed levels of business and housing investment, which because of Germany’s strengths in manufacturing have traditionally been a much larger element of GDP than in the UK.

You might expect poor business investment to in part be compensated for, given the recent rise in real wages, by growth in consumer demand. That’s what’s happened in the UK. But we’ve not seen it in Germany, with its cultural propensity to save rather than spend.

As for the fall-off in traditionally high levels of business investment, this is partly explained, according to Clemens Fuest, head of Germany’s Ifo Institute for Economic Research, by increasingly crushing levels of red tape and bureaucracy.

“It’s like requiring all citizens to report on their daily movements as a way of deterring shoplifting”, explains Prof Fuest. “Measured bureaucracy has become as bad as that, and for business investment, the effect is devastating”.

Similarly with housebuilding and construction, where rent controls and planning restrictions have seriously undermined supply.

In Berlin, voters have responded to housing shortages and rising rents by threatening larger landlords with expropriation; predictably, the effect has been to further deter new housebuilding.

With rising protectionism, what used to be one of Germany’s most admirable economic qualities – its propensity to export – has meanwhile become a key vulnerability.

This has in turn encouraged German firms already struggling to compete because of high labour costs to invest directly in overseas markets rather than at home.

The enforced switch from petrol and diesel engines, where German engineering has for decades reigned supreme, to electric vehicles, piles on the agony.

Germany’s Mittelstand of medium-sized family owned businesses, many of them heavily geared to the internal combustion engine – again once considered one of Germany’s key economic strengths – is in danger of being left high and dry.

To cap it all, Germany has found itself badly caught out by its heavy reliance on previously cheap Russian energy supplies.

With war in Ukraine, these have all but disappeared. It almost beggars belief that in the midst of such a crisis, Berlin should further shoot itself in the foot by closing its remaining nuclear power stations.

Relative strength in the public finances theoretically offers Germany a lifeline. Where Reeves finds herself condemned to “tough decisions” over tax and spend, Germany has all the fiscal room it needs to supercharge its economy with stimulus.

But Berlin also finds itself hemmed in by its own self-imposed debt brake rules, and in any case it’s not clear that Keynesian style stimulus works in a country which is structurally a world apart from Britain and also has a very different economic tradition.

Tax cuts tend to be saved rather than consumed, and there is already an unspent €80bn (£68bn) backlog of infrastructure projects held up in the works by byzantine logistical and planning constraints.

Germany’s problems are as much down to deficiencies in supply as demand.

Wander around any of Germany’s major cities, or stroll through its rolling countryside and picture postcard villages, and you wouldn’t believe that this is a country living on borrowed time.

Yet beneath the apparent prosperity lies a sea of trouble where millions are locked in part-time work by generous welfare entitlements that give little incentive to seek full-time employment, and where seemingly every problem is met with a “so ist das Leben” (that’s life) shrug of the shoulders.

Reeves would no doubt gladly swap her own challenges for those of her German counterpart, Christian Lindner, but economic stagnation is not a happy place to be, even when sugared by Germany-style work/life balance.

Germany will eventually bounce back – it always does. But there is a rude, and politically destabilising, awakening to go through before it does.

At least in Britain, we are already fully aware of the mediocrity of our circumstances. Germany still has that moment of self-realisation to come.

What are the real reasons Britain is stagnating?

 This long piece looks at differences between the US and other economies (mainly UK & Europe). It has a few core ideas you should try to get your head around - maybe two reads and some notes. Some ideas are simple yet highly quotable - "the difference between 2% and 3% [economic growth] is not 1%, it's 50%..." but nevertheless the points are all valuable - and should shape your thinking overall (I have linked the article in the headline):

How hard-working US is getting rich while the UK struggles on benefits

Economic complacency is creating a chasm between British and American living standards

BySzu Ping Chan22 July 2023 • 6:01am

“Thank goodness for the Americans.” The sigh of relief from Juliana Delaney, the boss of Continuum Attractions, came last week just a few breaths after she warned that Britons were cutting back.

Continuum, which runs tourist attractions from the shores to the seafront at Portsmouth, said Americans were bucking a trend of squeezed incomes and less spending.

Delaney’s comments were telling. The world’s biggest economy has pulled ahead of the UK and the rest of Europe on an array of economic measures since the financial crisis of 2008.

What began as a small disparity has become a chasm that has left Britain facing questions about whether it has the work ethic to close the gap.

Trailing not leading

Jeremy Hunt wanted to start the New Year talking about growth. “Declinism about Britain is just wrong,” the Chancellor told an audience of tech bosses and journalists in January.

A few moments later he was celebrating the UK being the “middle of the pack” of the G7 growth league table. Output per hour worked is higher than pre-pandemic, he boasted. At 1.6pc above pre-covid levels, economist Sam Bowman says it’s hardly something to celebrate. “We aren’t leading the world. We’re trying to catch up”.

Leading author and economist Daron Acemoglu, whose book ‘Why Nations Fail’ made waves a decade ago, says the consequences of being “okay with mediocrity” and dire productivity are huge.

Getting more from less has always been the key to rising living standards. The ability to increase the amount of output per hour worked tells us how much the economy can grow without generating too much inflation.

When productivity grows, so do company profits and staff wages. This leads to stronger growth, a bigger economy, rising tax revenues and smaller borrowing bills.

“The UK’s productivity problem is a disaster,” says Acemoglu. “This is an amazing economy that should be growing much faster, and not doing anything about it is the biggest risk.”

But Bowman’s concern is that the UK has now fallen so far behind the frontier in terms of economic development that worrying about technological progress “doesn’t make much sense”. At worst, he adds, it’s “a serious distraction”.

And the economic outlook is far from rosy. Living standards are on course for their biggest two-year fall since records began. The tax burden is also on course to hit a post-war high. The UK’s long-term growth potential is diminishing. Economists are warning of another decade of lost pay growth, while the Bank of England is set to inflict more pain on borrowers with further interest rate rises.

Ben Ansell, a political scientist at Oxford University, says all of this matters at the polls.

Take Selby and Ainsty, located 90 minutes away by car from Rishi Sunak’s Richmond constituency in North Yorkshire. Many factors turned the former mining constituency red in last week’s by-election, including the economic backdrop, says Ansell.

Selby is in the top 40 constituencies in England and Wales for the number of mortgage-holders, with 35.9pc of households still paying theirs off, according to latest census data.

That puts rising interest rates at the forefront of many constituents’ minds, along with the rising cost of living and fuel prices (this is an area of high car ownership and where the proportion of people aged between 30 and 64 is above the national average).

The UK-wide shift to Labour among homeowners has been huge, particularly among those with big mortgages, says Ansell. Back in 2019, the Tories had a comfortable lead over Labour among anyone who owned a home.

Today, that’s all been erased. Labour has a 15 point lead over the Tories among people who have less than 50pc left on their mortgage. Among those who own less than half, the lead is 43 percentage points, he says, citing recent polling.

“Big, big gaps are opening up by age,” he adds. “It’s younger working people who have veered further away from the Conservative Party. And that’s a problem because traditionally the Conservative Party always does well with these groups – these were the Yuppies in the 1980s. So when Conservatives have been worrying about losing millennial homeowners, they’re right. And it’s that group of people who are most affected by interest rates.”

As politicians begin their pre-election strategies, economists worry that the gap between the UK and US continues to widen.

The differences on paper are already stark. Bowman highlights that in the decade before the pandemic, productivity growth of 8pc was twice as fast in the US as the UK. America’s economy has also grown much faster overall.

In 2021, an American worker was 26pc more productive than their British counterpart, producing $74.80 (£58.30) per hour worker versus $59.20 per hour for a British worker.

A more productive workforce means better pay, with the average American worker paid $77,500 in 2022, compared with  $54,000 in the UK, according to one OECD measure that adjusts for buying power in each country.

For some professions the differential is stark. A nurse in America can expect a pay packet of $85,000, compared to the $48,500 for a nurse working in the UK. During the pandemic, stark shortages and a more mobile US workforce meant many commanded much higher salaries.

“In other words, Americans can stop working each year in September and they’d still be richer than Britons working for the whole year,” says Bowman.

These differences add up. A study published this month by the European Centre for International Political Economy (ECIPE) think tank highlights that the difference between 2pc and 3pc annual economic growth is not one per cent, it’s fifty.

“While it’s common to compare levels of growth between countries in a single year, the reality is that it is the long-term trend that matters,” the paper says. “An economy that grows at 3pc per year will double in 24 years but an economy that grows at 1pc will double only in 48 years. For a long time now, the average growth rate in mature and developed European economies has been closer to 1pc than 3pc.”  

Oscar Guinea, senior economist at ECIPE, says this divergence in economic fortunes between the UK and US has created a growing prosperity gap. ECIPE says if European countries were US states, many of them would be at the bottom of the league table in terms of GDP per person – including the UK. Every country in Europe is poorer per head than every state except Idaho and Mississippi. The UK languishes near the bottom between France and the Gem State.

It wasn’t always this way. Back in 2000, GDP per capita was higher than 14 US states and similar to that of Ohio or South Carolina. Two decades later and the UK has dropped 11 positions to have a GDP per capita that is closer to Arkansas.

The UK’s GDP per capita has fallen in the last two decades to a level close to that of Arkansas CREDIT: john finney photography/Moment RF

If these trends continue, by 2035 the gap between output per person in the US and EU will be as large as that between Japan and Ecuador today.

Guinea says the gap between the US and UK will be more like the one between Spain and Gaza.

Made in America

There’s no free lunch. And in the world’s largest economy, there aren’t many long ones either.

Americans spend 20pc more of their time working than their British counterparts, working an average of 1,811 hours per year, compared with 1,532 hours, according to the OECD. The UK is often singled out as having one of the most flexible job markets in Europe. But America’s “at will” system of employment makes two weeks’ notice a courtesy, rather than a requirement.

Paid leave is also not a legal requirement, though many companies offer 10 days as standard. Ansell, who spent a decade working in the US, says he’s still internalised the idea that taking too much time off is a bad thing.

“I think the longest holiday I’ve had since 2000 is about eight days. The idea of taking two whole weeks off is still a bit strange for me.”

When Covid hit, America preferred firings to furlough, albeit with government stimulus cheques helping to soften the blow of unemployment. More than 20 million people lost their jobs in April 2020 alone, pushing the unemployment rate to 14.7pc – the highest since the Great Depression. But it also shifted workers to more productive areas of the economy on their return. By contrast, UK policymakers largely pressed the pause button, funding wage bills for staff in existing jobs.

The pandemic had a huge impact on both the US and UK workforces, but while America saw a bigger increase in unemployment, many Britons gave up looking for work altogether.

Inactivity grew twice as much in the UK than in the US between the end of 2019 and the start of 2023, especially among older workers aged between 50 and 64 years-old, according to the International Monetary Fund. “High inactivity due to illness has been a distinctive feature of the UK, despite a relatively low inactivity rate in level terms,” it said. “If inactivity becomes structural, it could reduce labour supply and affect medium-term growth. In such a scenario, even if productivity grew twice as fast as in the pre-pandemic decade, medium term potential output will mechanically be lower than otherwise.”

A new report by the Institute of Employment Studies that will be published this week goes further, blaming the UK’s job centres for failing people who want to work. The share of jobseekers who contacted Jobcentre Plus to look for employment in 2020 is the lowest in Europe. The IES says its use has “dropped precipitously” in the last two decades as its focus has narrowed to people claiming certain types of benefits. People also feel discouraged by the “any job” mindset, which fuels turnover and disempowers jobseekers.

As a result, jobseekers in other European countries are three times as likely to use employment services and four times as much in Germany. The IES think tank notes that this avoidance of job centres cannot be explained by higher use of private recruitment services in the UK. On average, 24pc of British jobseekers in both the EU and the UK say they have used private recruiters.

It adds that there is “little or no support available for people in low-paid work who may want help to increase their hours or progress, nor for (potential) second earners in households where a partner is working”. There is also very little help for the self-employed or those who became economically inactive during the pandemic.

The Government’s own tax and spending watchdog warned this month that changes to the benefits system mean people are more likely to seek benefits where they don’t have to look for work.

The Office for Budget Responsibility (OBR) said that “tightening conditionality in other parts of the system can lead to rising claims for unconditional incapacity benefits”, including a surge in mental health-related claims.

Getting rid of face-to-face benefit assessments during the pandemic has not helped. “Various Covid easements” sent the approval rate for incapacity benefits in the early part of the pandemic to “close to 100pc”, up from 55pc in 2016-17. The OBR notes that if incapacity benefit claims had remained at 2016-17 levels “there would have been 670,000 fewer approved claimants”.

Tom Pursglove, minister for disabled people, health and work, says changes will take time. “I do know that there is a structural problem with our benefits system, where we’ve got considerable numbers of disabled people and people with health conditions who would like to try to work,” he says. “They regularly say to me, we would like to try. In fact, we may have even spotted an opportunity. But the structural problem we have in the benefit system is someone may try that role but it doesn’t work out, and then they lose their benefit entitlement and have to be reassessed in order to access support again. The jeopardy of all that gets in the way.”

The Government has set in train plans to change the focus of handouts to focus on the things people can do, rather than what they can’t. However, the Department for Work and Pensions admits that no changes will be seen before the end of the decade. “We need to fundamentally rework the benefit system to get rid of that structural problem which we’ve committed to, but there needs to be that intensive employment support too,” says Mr Pursglove.

Health and wealth

One area where the US isn’t as attractive as the UK is healthcare. Life expectancy in the US is lower, even though health spending is much higher. One reason is because healthcare is much more expensive, and while US employers often cover the cost of insurance, it isn’t universal. While 90pc of people in America have some form of healthcare insurance, the NHS means the share in the UK is 100pc. ECIPE recognises some of these differences in its analysis. “It is the case that the EU distributes its resources more equally than the US and has more generous welfare policies,” it says. “In the EU, the richest 10pc hold 36pc of pre-tax national income and the bottom half hold 19pc. In the US, these numbers were 45pc for the richest 10pc and 13pc for the poorest half.”

But, the US has “become more European” in recent years, closing the gap on social spending with the EU from six to four percentage points over the past two decades.

Oscar Guinea at ECIPE says this is a message for people who argue that America is a richer but more ruthless place to live.

UK nurses earn $48,500 on average compared to $85,000 in the US CREDIT: TOBY MELVILLE/REUTERS

“This is a ‘wake up and smell the coffee’ type of moment where the differences are too large to ignore. They can’t just be dismissed by people who say ‘this is because the Americans work longer’ or ‘This is because Americans are willing to accept more inequality’ or ‘because the Americans spend less on social security and social spending’. They’re all true, but they haven’t been getting worse over time. Inequality has been stable, the difference in working hours is stable. The US is actually spending more on social security. But this growth gap is there for everyone to see.”

Guinea urges policymakers to look at regulation, which is far more heavy-handed in Brussels than Washington DC. He says the bloc also needs to be more ambitious. He uses the example of the Lisbon Strategy announced at the start of the millennium with much fanfare. Its aim was for the EU to become the “most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion”. Yet little has been done since.

Bowman says policymakers must get back to basics because even worthy goals like net zero have become a distraction, he adds. Policymakers must spend less time being devoted to tackling issues such as obesity, gender and racial pay gaps and more on growing the overall pie that will enable more spending to achieve these goals.

“Economic growth is being neglected,” he says. “I am very pro-decarbonisation and I acknowledge that this is a really important problem that we need to solve. But what I don’t know is that the way we’re trying to solve it is particularly mindful of its impact on economic growth. And I think that if we did acknowledge that there is a trade-off between the way we approach net zero and economic growth, we might approach it in a different way.”

He uses net-zero as an example where “every level of government has been tasked with having a plan for its own little area”. Even the Bank of England has its own 51-page climate transition plan where Governor Andrew Bailey will oversee the installation of heat pumps at Threadneedle Street.

But Bowman argues that these plans do not take into account even basic questions such as will net zero homes be nice places to live in. A recent viral photo showed how new safety and net-zero related rules on buildings governing ventilation, energy efficiency and heating have distorted the way windows are installed in houses because glass areas cannot exceed 25pc of the overall floor areas. The Government’s Committee on Climate Change recently recommended that roads which make emissions worse should be banned. Bowman says this is a disaster for growth.

“I find it a bit crazy that windows have to be a certain size basically to maximise net-zero benefits. The problem from a housing point of view is if you’re building houses that people don’t want to live in, then you limit the benefits of building them in the first place.”

Bowman and Ansell say improving mobility and housing provision is key. Ansell says: “Some of the productivity gap we have is linked to the fact that when there’s a booming area in the UK, it’s really hard to move to that area – unlike in the US. People can’t move to where the jobs are because there aren’t houses there.”

Guinea says all of these policy proposals suggest the answer to Europe’s woes remains higher growth. “One of the reasons why we compared Japan and Ecuador is because which country do you think is better prepared to fight climate change? Is it Japan or is it Ecuador? Economic prosperity matters if you want to face the challenges of climate change or an ageing society. It will also enable you to transition to an ageing society and devote more resources to public services.”

Of course, there are pros and cons of living on either side of the pond, as one person recently commented on the internet forum Reddit. “Over simplified, but: on a scale of 1-10, life in America is a one if you’re poor and a ten if you’re rich,” they observed. “In England it’s a four-to-six no matter what. I’ll take the security of that.”

But as we are learning, there is little security in mediocrity.